Interesting ECB paper on the costs of existing payment mechanisms

[Mike Hearn]

http://www.ecb.int/pub/pdf/scpops/ecbocp137.pdf

They estimate that we lose around 1% of GDP to costs incurred by existing payment mechanisms (banks, debit/credit cards, cash, cheques). That's a lot higher than I'd have expected. Most of the cost falls (no surprise) on retailers.

[Timo Y]

http://www.ecb.int/pub/pdf/scpops/ecbocp137.pdf

They estimate that we lose around 1% of GDP to costs incurred by existing payment mechanisms (banks, debit/credit cards, cash, cheques). That's a lot higher than I'd have expected. Most of the cost falls (no surprise) on retailers.

This 1% GDP figure includes both the cost of friction and the cost of insurance.

Effectively, most credit card payments come with a mandatory insurance and escrow service. I suspect that those kinds of features make up the bulk of the 1% figure.

Bitcoin can make a huge difference to the cost of friction.  Insurance costs are harder to reduce, but even here Bitcoin can help.  By giving people choice on how much insurance they want for each individual transaction, people can eliminate insurance costs from transactions where insurance is not needed. eg. small face-to-face purchases.  More choice will also reduce the "moral hazard" behavior that credit cards encourage at the moment with their flat-rate monopoly insurance fees.   People will be more careful about using their credit card on questionable websites, etc.  This will reduce insurance costs across the board.

[rpietila]

During the times when physical metals needed to be transported over distances, the loss of GDP was incalculable. It was the advent of banking that has changed the world. Not central banking, though. That was just a power grab.